Crisis Mismanagement in The United States And Europe: Impact On Developing Countries And Longer-Term Consequences

The ultra-easy monetary policy has not been very effective in easing the debt overhang and stimulating spending – hence, the crisis is taking too long to resolve, entailing unnecessary losses of income and jobs and aggravating inequality. But it has generated financial fragility at home and abroad, exposing developing countries to a new boom-bust cycle. Tapering does not yet signal a return to monetary tightening and normalization of the Fed’s balance sheet. Besides, the policy rates are pledged to remain at historical lows for some time to come. Thus, ultra-easy money is still with us. But the markets have already started pricing-in the normalization of monetary policy and this is the main reason for the rise in long-term rates and the turbulence in emerging economies. The crisis has in effect demolished the myth that South has decoupled from the economic vagaries of the North and major emerging economies have become new global engines. Policy response to a deepening of the current financial turbulence in the South should depart from past practices. Emerging economies should avoid using their reserves to finance large and persistent outflows of capital and seek, instead, to involve private lenders and investors in crisis resolution. This may call for exchange restrictions and temporary debt standstills.